NYT continues to ask questions about who knew what when
In an hourlong interview with The New York Times, Mr. Paulson defended Treasury’s actions, saying that he and his aides had done everything they could, given the deep-rooted problems of financial excess that had built up over the past decade. “I could have seen the subprime problem coming earlier,” he acknowledged in the interview, quickly adding in his own defense, “but I’m not saying I would have done anything differently.”
Filed under Market Failure, Policy
NYT piece confirms the ubiquitous nature of the GS machine present within government:
Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.
Filed under Market Failure, Policy
Just some thoughts that need expanding:
The collapse of the financial systems provides demonstrations of how the assymetry of information can undermine the foundation of a sound, efficient market system. Evidence of adverse selection (principal lacks sufficient information to select the best agent) and moral hazard (principal lacks information necessary to understand whether the agent is performing as contracted). Self-regulation clearly struggles to meet these two challenges, and that is where public interest, and public value, justify public intervention into market regulation.
Washington Post analysis on the possibel demise of American style Capitalism describes the failures:
Given that the United States has held itself up as a global economic model, the change could shift the balance of how governments around the globe conduct free enterprise. Over the past three decades, the United States led the crusade to persuade much of the world, especially developing countries, to lift the heavy hand of government from finance and industry.
But the hands-off brand of capitalism in the United States is now being blamed for the easy credit that sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments that has infected the global financial system. Heavy intervention by the government, critics say, is further robbing Washington of the moral authority to spread the gospel of laissez-faire capitalism.
Filed under Uncategorized
Bernanke, using history of the Great Depression, opines:
Finally, Mr. Bernanke, who is an authority on the Great Depression, said that the country and its federal officials had learned from history that inaction or delayed reaction to financial calamity could be disastrous.
“This is not the situation we face today,” he said, predicting that official Washington’s fast response “together with the natural recuperative powers of the financial markets” will pave the way toward recovery.
Filed under Market Failure
Review in the Chronicle discusses whether the current financial crisis causes one to consider whether economics is taught well. Here are a couple of interesting quotes:
At some point, and this is as good as any, we have to ask ourselves if we have been teaching theory or ideology.
What about a return to the idea that economic theory does not offer settled answers but instead offers only an engine of analysis? Are we fearful that if we allow for too much ambiguity in the use of our theories, we will no longer be perceived as proper scientists? If anything, this episode should remind us to remind our students that there may not always be a unique right answer.
And —
This crisis is built on the foundations of financial illiteracy.
And —
It is very ironic that the end result of the misplaced application of incentives in the Soviet Union led to the increased role of the market system in that country. In the United States, the misplaced application of incentives is bringing about greater government intervention in the economy.
Filed under Market Failure, Policy
Article in NYT concerning the evolution at Fannie Mae. The pressure to take more risky loans came during the heyday of the Republican Congress. But it wasn’t just Congress, as Gov. Palin said during the debate on Oct 2. Wall Street, investors and the White House pressured Fannie Mae to underwrite the subprime mortgages being written by Countrywide and others.
Seems Fannie Mae had connections to GS:
But earlier this year, Treasury Secretary Henry M. Paulson Jr. grew concerned about Fannie’s and Freddie’s stability. He sent a deputy, Robert K. Steel, a former colleague from his time at Goldman Sachs, to speak with Mr. Mudd and his counterpart at Freddie.
Mr. Steel’s orders, according to several people, were to get commitments from the companies to raise more money as a cushion against all the new loans. But when he met with the firms, Mr. Steel made few demands and seemed unfamiliar with Fannie’s and Freddie’s operations, according to someone who attended the discussions.
Rather than getting firm commitments, Mr. Steel struck handshake deals without deadlines.
That misstep would become obvious over the coming months. Although Fannie raised $7.4 billion, Freddie never raised any additional money.
Mr. Steel, who left the Treasury Department over the summer to head Wachovia bank, disputed that he had failed in his handling of the companies, and said he was proud of his work .
Mr. Steel now has a court fight over to whom he can sell Wachovia (disaster seems to follow him, no?). Wonder what color his parachute is?
Filed under Market Failure, Policy
The big 5 investement bankers asked for a rule change at the SEC — that this article said created a situation where the information that might have predicted the current crisis became invisible.
The man representing Goldman Sachs at the table, then became Treasury Secretary Paulson.
Markets do not operate well when information is obscured.
An example of where market failure is precipitated by public value failure
Filed under Market Failure, Policy
An opinion piece hypthosizes how an assumption on the isolation of risks in the Wall Street risk models was wrong…
Filed under Market Failure, Policy
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